Merchant Cash Advance: The Small Business Owner’s Guide

A merchant cash advance (MCA) is a lump sum cash payment given to a company in exchange for a fixed percentage of its daily credit card receipts. Merchant cash advances are short-term financing options characterized by terms under 2 years and daily payments equal to a percentage of a company’s total daily credit receipts. Merchant cash advances are not considered loans but are rather the sale of a company’s future credit sales.

Merchant cash advances have a relatively high cost of capital and are often used as a last resort for working capital needs. They also have flexible, revenue-based repayment schedules which can be appealing to small businesses with large swings in sales. Most small businesses will prefer a short-term loan since they’re often more affordable, have an easy online application process, and can provide same-day funding. Check out our guide on short-term loans here.

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a cash advance given in return for a percentage of a business’s daily credit card receipts. Merchant cash advance providers charge a cost of capital equal to a cost of capital between 1.1x – 1.4x of the amount advanced. This results in a cost of capital that’s much higher when compared to other fast business loans.

MCAs are issued by merchant cash advance providers and businesses can apply if they have accepted credit card payments for 2+ years and have $50,000 in annual credit sales.

Merchant cash advances are used by businesses to cover the following:

Short-Term Financing Needs

Working Capital

Cash Flow

MCAs are a quick funding option and businesses can receive the lump sum payment in as little as 2 – 5 days. However, merchant cash advance providers typically require that a business has the following qualifications prior to issuing a merchant cash advance (MCA):

This is because a merchant cash advance provider wants to evaluate risk and assess the credit criteria of a business and its owners. MCA providers typically look at a company’s daily receivables or daily credit card receipts to better understand if the business will be able to pay back the advance in a timely manner.

MCA providers usually like to see a target dollar amount that a business does in monthly credit card transactions prior to issuing a merchant cash advance. The exact target varies by providers and is unique to the amount a business needs to borrow. However, all merchant cash advance providers want to ensure they’ll be repaid in a timely manner, typically within 12 – 24 months.

Merchant cash advances are considered a costly loan option and are used by seasonal businesses or used as a last resort for companies that can’t find funding elsewhere or that don’t have good credit. The approval process typically takes between 2 – 5 days. Once approved, merchant cash advance providers charge a factor rate (discussed below) and take a percentage of a business’s daily credit card receipts, known as the “holdback percentage.”

If you’re interested in discussing specific MCA terms with a verified provider, check out Credibly. Credibly offers affordable financing options that include MCAs and term loans. Offering both ensure you get a product that’s the best fit for your business.

“Merchant Cash Advances can be a good option when a business needs funds fast, the business owner has fair to average credit and can’t qualify for a traditional loan, or if a business doesn’t have several years in operation because most banks will require at least 2 years in business for a loan. The overall speed of the advance is typically the most important.”

However, remember that there’s less federal regulation around merchant cash advances and you might encounter some predatory lending practices. It’s important to check the reputability of any merchant cash advance provider. However, merchant cash advances are still advantageous for companies who need to fund the following:

Short-term financing needs

Working capital requirements

For example, we interviewed Ryan Rossett, the co-CEO of Credibly, who said that:

“A merchant cash advance is a great source of working capital financing for seasonal businesses. Since repayments are made as a percentage of a company’s daily credit card receipts, seasonal businesses aren’t put into financial distress like with a fixed-term loan.

Instead, the amount of repayment is tied to the success of the business. So, in slower months, seasonal businesses repay comparatively less than in busier months, helping a business with a quick cash advance and as well as with favorable repayment terms.”

Still, many businesses fall into the trap of a never-ending cycle of merchant cash advances. For example, a company might use an MCA to pay off an existing debt, only to find that the MCA repayment is more expensive. When this happens, companies are sometimes forced to take out another MCA to pay off the first one, subsisting the cycle indefinitely.

When applying for a merchant cash advance to fund your short-term needs, it’s important to ensure that you’ll be able to make full repayment in a timely manner.

How Does a Merchant Cash Advance Work?

During the application process, a merchant cash advance provider assesses the credit of the business owner as well as the monthly credit card transactions of the business. If approved, the MCA provider issues a lump sum amount within 2 – 5 days of applying. The average cash advance is typically between $10,000 – $1,000,000.

Repayment terms are based on what’s called an MCA’s “factor rate.” The factor rate is the multiple that a business will have to repay over the life of the advance. For example, the average factor rate of a merchant cash advance is typically equal to:

1.1 – 1.4 Average Factor Rate

This means that for every dollar advanced, a business will have to repay $1.20 – $1.40 over the life of the advance. So, if a company receives a lump sum payment of $10,000, and if the factor rate is 1.2, the business will have to pay the MCA provider a total of:

($10,000) x (1.2) = $12,000

Once the lump sum is issued, merchant cash advance providers take a daily percentage of the business’s credit card transactions for repayment. This is known as the merchant cash advance’s “holdback percentage.” The daily holdback amount is taken directly out of a business’s merchant account. The average holdback percentage is typically equal to:

8% – 30% Average Holdback Percentage

Each day, the merchant cash provider collects the holdback percentage as its daily repayment for the lump sum advance. So, if a business receives a merchant cash advance (MCA) with a 10% holdback percentage, the MCA provider receives 10% of the company’s credit card receipts daily until the factor rate is paid in full.

For example, if a company borrows $10,000 with a factor rate of 1.2 and a holdback percentage of 10%, and if the company typically has $500 worth of daily credit card transactions, the MCA provider would receive the following payments daily:

($500) x (10%) = $50

The daily holdback percentage is taken out of the merchant account by the credit card processor and paid directly to the merchant cash advance provider. There is nothing a business needs to do in terms of repayment.

This is why MCA providers typically require a company work with a partner credit card processor as part of the application process. If your business does not work with an MCA-approved credit card processor, you’ll have to change processors as part of your merchant cash advance application.

Further, a business’s credit card receipts fluctuate daily. This makes the total payback time variable. Using the example above, a business won’t always make $500 in daily credit card transactions. If one day the company makes $400, the MCA provider will only receive $40 on that day with a 10% holdback percentage.

This happens daily until the factor rate is paid in full. The average payback time of a merchant cash advance is therefore unknown until the factor rate is repaid in full. However, the typical merchant cash advance is repaid within the following timeframe:

12 – 24 months

The more daily credit card transactions a business does the quicker the MCA is repaid. Conversely, the lower the daily credit card transactions the longer it takes to repay. This means that the merchant cash advance repayment is relative to a business’s cash flow.

Merchant cash advance providers work with the partner credit card processor until the merchant cash advance is repaid at the agreed factor rate. Once the full payment is made, a business has no further obligation to work with the MCA provider or the required credit card processor.

Now that we have a better of how a merchant cash advance works, let’s take a moment to discuss each component of an MCA in depth.

1. Merchant Cash Advance Costs

The costs of a merchant cash advance (MCA) are largely dependent on the following factors:

Lump sum amount ($10,000 – $1,000,000)

Factor rate (1.2 – 1.4)

Holdback percentage (8% – 30%)

The average lump sum financing amount of an MCA is typically between $10,000 – $1,000,000. When applying for an MCA, the MCA provider approves the business for a maximum lump sum amount based on:

The business owner’s credit score

The business’s average monthly credit card receipts

Merchant cash advance providers typically want to ensure that a business has the credit card receipt volume to repay a merchant cash advance in a timely manner. Depending on the size of the lump sum, the MCA provider also issues a factor rate. The lower the lump sum the higher the factor rate, and vice versa.

The factor rate is the total amount a business will have to repay the MCA provider. The average factor rate is between 1.2 – 1.4.

For example, if a company receives a lump sum payment of $10,000 and has a factor rate of 1.4, the business will pay the MCA provider $14,000 over the life of the advance. The cost of capital in this scenario is 40%.

Once the lump sum amount and factor rates are agreed, the MCA provider also issues a holdback percentage. The holdback percentage represents the daily amount that the merchant cash advance provider will take from the business’s credit card receipts. The daily holdback is facilitated by the company’s credit card processor and a business doesn’t have to make any direct repayments.

The average holdback percentage is based on the following:

The size of the lump sum cash advance

The expected repayment period

The number of monthly credit card transactions

The average daily holdback percentage is between 8% – 30%. If, for example, a business has an MCA with a holdback percentage of 10%, it means that the MCA provider will take 10% of the company’s daily credit card receipts. Since a business’s credit card receipts fluctuates daily, it’s total daily payback amount will also fluctuate.

This makes the repayment time variable and will affect a company’s annual percentage yield (APR). Typical APRs on a merchant cash advance are typically between 80% – 120%. However, the most important cost of an MCA is the factor rate, since it represents the advance’s total cost of capital.

Some merchant cash advance providers also issue set-up or advance fees. These fees can sometimes reach as much as 5%. It’s important to understand any hidden fees that a merchant cash advance provider might charge prior to applying.

2. Merchant Cash Advance Terms

The average time to advance approval is typically around 24 hours. The average time to receiving the advance is usually between 2 – 5 days. This makes a merchant cash advance a quick financing option for businesses in need of cash.

However, the total time to repayment for a merchant cash advance (MCA) is variable and is typically between 12 – 24 months.

The time to repayment is variable because an MCA provider takes a percentage of a business’s daily credit card receipts. The payment is not a flat amount like a small business loan. So, the more a business does in credit card receipts the quicker the advance will be repaid. Conversely, the less a business does the longer it’ll take to repay the MCA.

This means that the daily repayment amount is dependent on a business’s credit card cash flow.

However, the quicker a business pays back its MCA, the higher its annual percentage yield (APR). While the total amount that’s repaid is always the same regardless of timeframe, the typical APR a business should expect to see is between 80% – 120% APR.

APR fluctuates based on a company’s daily credit card transactions and the agreed holdback percentage. The most important thing, however, is the factor rate, because that represents the total dollar amount a company will have to repay over the life of the advance.

3. Merchant Cash Advance Qualifications

Merchant cash advance providers have relatively low qualifications when compared to conventional loans and sometimes even alternative loans. Specifically, businesses should expect to have the following when applying for a merchant cash advance (MCA):

MCA providers want to ensure that a business has adequate daily credit card receipts prior to issuing an MCA. This is why MCA providers typically want to see more than $50,000 in annual credit card sales and over 2 years accepting credit card payments. This helps reduce their risk of default or their risk of an elongated repayment period.

Further, MCA providers will want to check the personal credit score of the business owner. Remember that a merchant cash advance is not a loan and it won’t show up on the owner’s credit report. However, the business owner is fully liable for the company’s MCA repayment.

Finally, merchant cash advance providers require that companies work with a partner credit card processor. This is because the MCA provider uses the partner processor to subtract the daily holdback percentage and deposit it into their account.

When assessing potential MCA providers, it’s important to consider the following:

Maximum lump sum amount

Factor rate

Holdback percentage

Set-up fees, if any

The maximum lump sum amount affects your factor rate. Your factor rate represents the total cost of capital. Therefore, you need to ensure that you’ll be able to pay back the original lump sum amount plus the cost of capital.

The holdback percentage is also important because it affects your daily credit card receipts. The higher the holdback percentage the more a merchant cash advance provider takes out of your daily credit card cash flow. However, since the holdback is based on a percentage of daily credit card receipts, the total daily amount taken by the MCA provider is dependent on your cash flow.

Finally, some MCA providers charge hidden fees, such as set-up fees and / or advance fees. These hidden fees can total as much as 5% or more. It’s important to understand the full amount of fees prior to applying with an MCA provider.

Let’s now take a quick look at a typical merchant cash advance application.

Merchant Cash Advance Application Process

The merchant cash advance (MCA) application process is fairly straight forward and can be filled out online. The typical application is as short as 1 – 2 pages. When applying for an MCA, businesses should expect the following six steps:

Let’s take a look at each of these six steps in-depth.

1. Fill Out Online Application

The initial application process is typically a 1- to 2-page form that can be found on a merchant cash advance provider’s website. As part of the application, business owners are required to submit the following:

Social security number

Business tax ID

General information about the business

This online application is used to assess the high-level suitability of a company. Once the application is filled out and reviewed by an MCA provider, the provider will reach out and ask for more specific documentation.

2. Provide Additional Documentation

If the initial online application looks good, the merchant cash advance provider will contact you to provide additional documentation. This usually occurs within 24 hours of the submission of the online application.

Specifically, business owners should expect to provide:

2+ months of credit card processing data

2+ months of business bank statements

Evidence of 2+ years accepting credit cards

This additional documentation is used to ensure that a company has at least $50,000 in annual credit card receipts as well as the cash flow needed to repay a merchant cash advance. As long as a business meets the minimum annual credit card receipt requirements, has adequate cash flow, and has 2+ years accepting credit cards, an MCA provider will most likely approve the MCA.

3. Get Approved for a Merchant Cash Advance

Based on the personal and business information provided in the first two steps, a merchant cash advance provider will approve a merchant cash advance (MCA). As part of this approval, the MCA provider gives a business its:

Maximum lump sum amount

Factor rate

Holdback percentage

The approval is nonbinding and gives a business owner the information he or she needs to accept or deny the MCA.

For example, if the maximum lump sum amount is too low, the factor rate too high, or the holdback percentage too high, a business owner might decline the MCA. If, however, the opposite is true, or if the financing needs are great enough, a business owner will accept the terms given to him or her by the MCA provider.

If accepted by the business owner, the approval time can take as little as 24 hours.

4. Set Up Credit Card Processing

If a business isn’t already using a merchant cash advance provider-approved credit card processor, the company will have to switch processors. This is because MCA providers work with specific processing companies to help collect the daily holdback amount as a percentage of daily credit card receipts.

The MCA provider will tell a company what credit card processors to use. It might be inconvenient and time-consuming to switch, but it’s a requirement as part of the application. The time to switch can add as much as a week onto the timeline to funding.

5. Receive the Lump Sum Cash Advance

Once the proper credit card processor is set up, the company is ready to receive the cash advance and pay the merchant cash advance provider daily. The initial cash is deposited directly into a business’s bank account.

Payments then come directly out of the company’s daily credit card receipts, similar to a processing fee. The credit card processing company facilitates the repayment. They do this by taking a percentage of the business’s daily receipts and deposits it into the account of the MCA provider.

6. Make Daily Repayments From Merchant Account

As soon as the cash advance is received, the business starts making repayments in the form of a daily holdback amount. The daily holdback amount is based on a percentage of the company’s daily credit card receipts, known as the holdback percentage.

While the cash advance is deposited into a business bank account, repayment is made via a company’s merchant account. Repayment starts as quickly as in a day and businesses should be ready to make payments as soon as they receive the cash advance.

As long as there is money in the merchant account, a merchant cash advance provider will receive daily repayments from the credit card processor. The total time to repayment is variable and based on a company’s average daily credit card receipts. However, the typical time to repayment is between 12 – 14 months.

Alternatives to Merchant Cash Advances

Of course, merchant cash advances aren’t a business’s only short-term financing options. There are other available funding options that help with short-term liquidity needs, including:

Business Loans & Business Lines of Credit

Accounts Receivable Financing

Let’s take a look at each option in a little more depth.

1. Business Loans & Business Lines of Credit

Small business loans & business lines of credit are more traditional ways to obtain short-term financing. These financing options provide up-front cash in return for flat monthly payments consisting of principal and interest.

There is no factor rate or holdback percentage with a small business loan or business line of credit. Instead, business lenders charge a monthly interest rate based on a business’s qualifications and loan amount. Qualifications for a business loan or business line of credit are more stringent than a merchant cash advance. Lenders typically base loan approval on the following:

Business’s financial performance

Business’s credit score

Business owner’s personal credit score

Average interest rates can range from 7% – 98% and the maximum loan amount can be anywhere from $10,000 to $500,000 or more. The total time to repayment typically takes anywhere from 3 months to 3 years, depending on the lender.

Specific small business lenders include:

OnDeck – OnDeck is a small business lender that offers term loans up to $500,000 and lines of credit up to $100,000. Interest rates can range anywhere from 7% – 98% or more, but OnDeck have average interest rates between 7% – 13.99%. Payments are made monthly and loan terms are between 3 months – 36 months.

Kabbage – Kabbage is another small business lender that offers small business loans and lines of credit up to $150,000. The lender charges 1.5% – 10% in interest and requires that all loans be repaid within 6 – 12 months. Funding can happen in as fast as 1 business day.

2. Accounts Receivable Financing

Accounts receivable financing is another traditional way to receive short-term business financing. Accounts receivable financing is a loan option where businesses use their accounts receivable as collateral.

Accounts receivable financing companies advance between 70% – 100% of a business’s accounts receivable and then collects the outstanding invoices for a small fee. The fee is generally around 0.5% weekly.

Accounts receivable financing companies typically base their qualifications on the amount of a business’s outstanding accounts receivable. The best AR financing companies can get you funded in about 1 business day.

Specific factoring companies include:

BlueVine – BlueVine offers invoice factoring amounts between $20,000 – $500,000. The lender charges a factor rate between 0.4% – 1.0% and its application is 100% online. Businesses can expect to receive financing in as little as a day.

FundBox – FundBox offers invoice factoring up to 100% of a company’s outstanding invoices. Fundbox has a maximum loan amount of $100,000 and has a factor rate of 0.5%. Loan terms are for a 12-week period.

Bottom Line

A merchant cash advances (MCA) is a cash advance given to a company in return for a percentage of its daily credit card receipts. MCAs can typically fund between $10,000 – $1,000,000 and an MCA provider can take between 8% – 30% of a company’s daily credit card receipts. These daily payments come directly out of the company’s merchant account.

While the financing is fast, merchant cash advances are also costly. Merchant cash advance providers charge a factor rate. This factor rate results in a cost of capital between 20% – 40%. Based on the factor rate and holdback percentage, a merchant cash advance is repaid anywhere from 12 – 24 months. Credibly offers some of the lowest factor rates we’ve found, and can get you funded within 48 hours.

About the Author

Evan Tarver is a staff writer at Fit Small Business, specializing in Small Business Finance. He is also a fiction author and screenwriter. His past experience includes investment banking, managerial finance, and technology. When he isn't busy scheming his next business idea, you'll find Evan holed up in a coffee shop in his hometown of San Francisco working on the next great American fiction story.

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Comments (2)Disclaimer: Reviews on FitSmallBusiness.com are the product of independent research by our writers, researchers, and editorial team. User reviews and comments are contributions from independent users not affiliated with FitSmallBusiness.com's editorial team. Banks, issuers, credit card companies, and other product & service providers are not responsible for any content posted on FitSmallBusiness.com. As such, they do not endorse or guarantee any posted comments or reviews.Post Your Comment

hi marc,
what is the cost to set up a merchant cash advance business , including the account to have payments processed thru for the receivables (Lein) PLEASE NOTE NOT THE CAPITAL TO ADVANCE BUT JUST THE COST TO ESTABLISH THE BUSINESS SYSTEM TURNKEY ?

Please ADVISE , AS I AM IN A POSITION TO ASSIST WITH HELPING THOSE WHO WOULD LIKE TO OPEN THEIR OWN MECHANT CASH ADVANCE BUSINESS WITH BANK AND DEBIT SYSTEM READY TO GO

2ND I CAN ASSIST WITH HELPING MARKETING AND SALES ORGANISATIONS PROCESS PAYMENTS PENDING THEIR VOLUME REVIEW.

PLEASE ADVISE IF THERE IS ANY AREA WHICH WE CAN BE OF ASSISTANCE TO YOU OR YOUR POTENTIAL BUSINESS SYSTEM OWNERS

Hi Mark, The merchant cash advance industry is currently undergoing a significant decline. Potential borrowers are gravitating to short-term loans instead of getting cash advances. The short-term loans generally have lower interest rates than MCAs and the cost is known in advance. I was speaking to one of the larger companies in the alternative small business finance space and they told me that MCA has shriveled from a major portion of their business to under 3%. In other words, I wouldn’t advice moving in this direction. Good luck, Marc

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